Strong vs. Weak Dollar

George Washington on Dollar Bill
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What does it mean to have a strong versus a weak dollar? The answer can be particularly helpful to investors in the stock market. If this debate confuses you, you're not alone. Our economy and stock investors thrive when there is a balance between a strong dollar and a weak dollar. Consumers pay reasonable prices for imported goods and our manufacturers can compete in the global marketplace.

With this brief review, get a better understanding of the weak versus strong discussion and the terms involved. 

Understanding the Strong Dollar

Most of the world's major currencies float in value relative to one another. The U.S. dollar is often the standard by which other currencies are measured. A strong dollar means that our currency buys more of a foreign county's goods. This can be good for consumers and international travelers because things they want to buy (think electronics) and places they want to go are cheaper.

However, the downside is U.S. companies that sell goods to foreign customers suffer because, relative to a weaker currency, our goods and services cost more. This may mean U.S. producers are at a disadvantage in the global market.

This can lead to manufacturers moving plants to foreign countries with lower costs, so they can remain competitive. In short, a strong dollar can mean jobs lost in the United States.

The Meaning of a Weak Dollar

A weak dollar means our currency buys less of a foreign country's goods or services. Prices on imported goods rise. Consumers must pay more for imports and foreign travelers may need to scale back a vacation because it is more expensive when the dollar is weak. However, a weak dollar also means our exports are more competitive in the global market, perhaps saving U.S. jobs in the process.

When a large trading partner (our largest) like China artificially keeps its currency weak, it hurts the balance of payments, meaning its goods are cheaper than domestically produced products. Though a short-term boon for the consumer, a weak currency of a foreign competitor means U.S. manufacturers have trouble competing.

Conflicts over currency can (and have) led to trade wars where import tariffs are imposed in response to artificially weak currency of major trading partners. Trade wars are generally counterproductive, but sometimes politicians are more concerned with what plays well with the home crowd rather than what it means for the overall economy.